WestJet Just Keeps Adding Complexity, And Somehow It Works

In general, complexity is the enemy of any good low-cost airline. Sure, by nature, legacy carriers have complexity in spades, and that’s why low-cost carriers try to avoid it; they can get a big cost advantage by staying simple. Canada’s WestJet used to bask in simplicity. It made huge margins while big brothers Canadian and Air Canada saw their dominance chipped away. But now, WestJet is anything but simple. Just last week it added another layer with WestJet Link, its first true US-style regional carrier capacity purchase agreement. This seemed like a good time to pause and look at just how complex this airline has become… and then scratch my head wondering how it keeps succeeding.

Flash back to 1996. WestJet took to the skies with just a few 737-200s from its Calgary home. The airline was inspired by Southwest, as all low-cost carriers were back then. One class of service, short flight segments, and… simplicity. At the time, Air Canada and Canadian were locked in a battle for supremacy, and WestJet was just a speck of dirt. But things changed quickly. WestJet grew, and grew, and grew. It didn’t need to roll out bells and whistles. It just needed to keep adding seats in new markets with low fares attached to them.

For the first few years, WestJet stayed in the western half of the country. By 2000, however, Air Canada had acquired Canadian and that meant opportunity knocked. WestJet headed east to continue its expansion. By 2002, Air Canada was scratching its head to figure out what to do about WestJet. It finally launched Zip, the airline with various fluorescent-colored aircraft that tried to clone WestJet out of Calgary. You might as well have called it Shuttle by Air Canada. It lasted only two years. Meanwhile, WestJet kept covering the country.

By the time Air Canada shut Zip down, WestJet was becoming more competitive. It changed its focus from secondary airports like Hamilton to primary airports like Toronto. Why? Well, that’s how you grow.

See, Canada isn’t all that big. It has a total population of around 36 million. That’s smaller than California. More importantly, that population is clustered. There are only 6 metro areas in the whole country with more than a million people. That means that at some point relatively quickly, WestJet was bound to run out of expansion opportunities. Once it moved into primary airports, it also started looking beyond the borders into the US and then eventually the Caribbean. Anywhere those 737s could fly, WestJet had to be considering it.

By the end of the first decade of the millennium, WestJet had already covered much of what it could do with 737s. That’s when the complexity came out. Just look at some of the things it launched.

Need a moment to catch your breath? Within one decade, WestJet will have completely remade itself from a simple, low-cost carrier into a legacy airline-type structure that actually makes some legacy airlines look like simple operations. It sounds crazy, but WestJet apparently just needs to keep finding ways to grow or it gets bored. I know a decade is a long time, but for a transformation like this, it’s really not.

You would think this would weigh heavily on WestJet’s earnings. After all, this kind of shiny object distraction has sunk many an airline before. Since 2012, WestJet has kept its annual operating margin above 10 percent. Last year in 2016, it was 10.7 percent. This year appears to be a bit behind that. Yes, WestJet has been one of the rarities in North America in that its margin has shrunk over the last few years. But it hasn’t fallen off a cliff as you might expect.

Every time WestJet comes up with some new idea that only adds complexity to the operation, I think it’ll be the straw that breaks the camel’s back. But so far, that hasn’t been the case. I guess we can just continue looking forward to more complexity until that day comes.

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23 Responses to WestJet Just Keeps Adding Complexity, And Somehow It Works

One of the main reasons that Westjet continues to prosper is that its main competitor is Air Canada — which is not loved. However, Westjet’s reputation is starting to slip. They’ve been making some public missteps lately and people are starting to paint them with the same brush that they’ve painted AC. We’ll see if that effects their bottom line.

I have to think part of that’s related to the complexity. Sending 737s from Calgary to Vancouver and Winnipeg and back every day makes for a pretty efficient, lean operation; my understanding is the 757 flights had significantly less reliability than the 737s, but it was such a small part of the operation that no one really noticed. The bread and butter was still saving 30% on your flight from Toronto to Edmonton (or whatever) vs AC, and that’s what gave them their reputation.

Of course, on top of all of that, a duopoly really isn’t great for competition – you can decide to not compete on some routes, or to undercut your competition slightly, but that’s it. Unless you’re flying from Toronto east on Porter, or to a southern holiday destination and Sunwing is an option, there’s no real competition (I guess you could add flying to the US and onwards for long-haul as a quasi-alternative option?).

Indeed, Air Canada is not loved by Canadians but any time I travel AC, the flight is packed tight. So how did that happen? They can’t all be foreigners. I think WestJet looks more like AC every day….which is great news for Air Canada. When you start out you have young, cheap staff. Twenty years later? Do they even have a pension? Are the pilots now unionized? Their 767 operation has had some poor reliability and limited impact. For example, they only fly Winnipeg – Gatwick once a week and that is for a very limited period. AC goes into Heathrow eighteen times a day. There are new attempts to start up genuine lo-cost carriers in Canada. Again. This time, it’s WestJet as well as Air Canada that will be under pressure.

WestJet does well in the duopoly of Canadian airlines because they only have to really compete against one competitor. South of the 49th you have a handful of national airlines to compete against depending on the markets served. It’s relatively easy to throw a 767 on an international route and peel people away from one local competitor at YYZ or YUL. Doing the same at JFK? Not as easy.

In the US we have 11 mainline passenger airlines not including the regionals. For a population of about 324M that is a ratio of one airline per about 30M people. Granted in Canada its much lower but don’t forget that Canadians travel very well. So for arguments sake lets say Canadians travel 2x as much as Americans. In that scenario I’d argue that market is under-served comparably to the US.

Those two things make Canada an easy place for WestJet to prosper. Not to say someone else can enter on the low end and make a blood bath of the market but for now I think they have a sweet spot. Quite enjoy flying with them too.

It is interesting to consider what Southwest (which is now essentially a “legacy” airline in the US, and no longer really an LCC) could learn from WestJet’s efforts. Southwest has certainly reached the saturation point in the US, and will need to add complexity (as it has been starting to, with the IT fixes and flights to Hawaii) if it wants to continue to grow.

I think that the airlines that fail when they add complexity when there’s real competition. In a duopoly situation, even if the total market is fairly small, the landscape is fundamentally different. WestJet’s challenge is more to find ways to get into additional markets than to avoid complexity for the sake of avoiding complexity.

WestJet is successful for one of the key reasons Southwest is successful. The vast majority of its fleet is a single aircraft type — the Boeing 737. Back in 1996, when WestJet was created, Boeing was launching the 700 to 900 series of the 737. This aircraft, along with its chief competitor, the Airbus A320, gave discount airlines transcontinental and borderline intercontinental range.

The game changed at that point. WestJet could take on Air Canada and some of the US legacy carriers. It grew because engine and flight technology allowed it to do so. And, because it had the capital backing to survive a growth spurt.

As technology continues to grow and as barriers to international travel fall, expect WestJet to be an even larger competitor to Air Canada on international runs.

I wouldn’t overstate the importance of a single fleet type in WestJet’s Case. The number of city pairs in Canada that can reliably fill a 737 is a lot fewer than in markets like the US, EU, or India. Like Cranky said, they ran up against that constraint fairly quickly and that’s why they needed to expand into different kinds of flying fairly early on.

Southwest and Ryanair still have growth opportunities in their home markets achievable largely with the same game plan as before. WestJet has to be a little more audacious.

There’s a very strong analogy to Virgin Blue/Virgin Australia. Similar-size country in total population, population density, and distance between large cities. They started as a simple, low-cost competitor to a duopoly of legacies. Then one of the legacies went under and they found themselves as the second airline.

Virgin Australia too pretty quickly reached the limits of what they could do as a no-frills, single-fleet LCC. They too found that they had to get more complex to pursue the opportunities that were out there. They too started (acquired out of near-liquidation, in their case) an ultra-LCC to renter the space they started in.

I think that’s an illustration of the fact that the norm that complexity is bad for LCCs is based in areas which are large enough for more than two good-sized airlines like the US and Europe and may not apply at all in a duopoly.

Alex – Except Virgin Australia has been pretty unsuccessful. You’d think it would find a place in the world since Qantas is the only other competition, but it keeps having trouble and now has a million different owners who likely all want different things. Things have improved lately, but only after years of poor performance.

They were such a profitable nimble operation in the early days. Then they decided to get:
– The 777s to service North America
– a330s to serve trans con flights with excellent flatbeds
– E170 and E190’s which are now all done
– Purchase skywest (Australia) and its mostly F100 aircraft…

If anything, Westjet’s closest counterpart these days is an airline like IndiGo or Cebu Pacific: a WN-style short-haul, homogenously-fleeted LCC at first that eventually branches out into different aircraft types and business segments, including regional and international service.

Yes, to you it appears to be additional complexity. But to many of us, it is a growing magnet drawing us to them. Conduct a survey. Who prefers flying on AC to WestJet? All they are doing is to expand their customer reach vs. AC. The more they expand, the more AC loses.

I’m virtually certain that Canadian cabotage laws prohibit travel between two points in Canada on a US carrier.

For example, searching united.com for YVR-YYZ flights (which United certainly could in principle serve on their own metal via ORD), they only return AC-coded (and of course AC-operated) nonstop and one-stop (via YYC, YEG, etc) options. Nothing with a United code and nothing via the US. aa.com just finds nothing for that or any other domestic Canadian route. flights.google.com also turns up only Canadian-airline flights.

Now it’s possible that US carriers are legally allowed to sell Canada-Canada itineraries and choose not to, but I doubt that very much.

partim – This is fascinating. It only happens on the European version of the AA site, not the US version. I think this may be a glitch with Amadeus which powers the search. I’ve asked American to look into this and will report back when I hear anything.

Interesting. As Cranky notes, this shows up only on the European site. (I couldn’t get it to show up via either aa.com or aa.co.uk, but could via aa.de.) Looking at the fare rules, it’s two fares, YYC-NYC and NYC-YYZ, since AA of course doesn’t have a YYC-YYZ fare filed.

I’m not about to try to ticket this fare, but it let me get all the way to the credit card information page. I wonder if it would ticket? It almost certainly shouldn’t.

Incidentally, AA has a very nice, legible display of the fare rules on the European site. I wonder if that’s required by Europe? If so, AA has absolutely no justification for not having a similarly-legible fare rules display on the US site.

WestJet is successful because they know people’s need very well. They always offer new things to their customers. Air Canada is less popular because people love to go with WestJet. Good luck for future business.